|U.S. SECURITIES AND
EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K


[X] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the fiscal year ended December 31, 2002


[ ] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



For
the transition period from _________________________ to _____________


Commission File Number:
0-30753



FIRST FEDERAL
BANCSHARES, INC. (Exact name of
registrant as specified in its charter)
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|DELAWARE                                    | 37-1397683                          
|------------------------------------------- | ------------------------------------
|(State or other jurisdiction of             | (I.R.S. Employer Identification No.)
|incorporation or organization)             
|                                           
|109 East Depot Street, Colchester, Illinois | 62326                               
|(Address of principal executive offices)    | (Zip Code)                          

|Registrants
telephone number, including area code: (309) 776-3225



Securities registered
pursuant to Section 12(b) of the Act: None


Securities registered
pursuant to Section 12(g) of the Act:


Common Stock, par value
$0.01 per share(Title of Class)


Indicated
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes __X__  No _____


Indicated
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of the registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. __X__



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Act). Yes _____ No __X__



The aggregate market value of the voting and non-voting  common equity held by  non-affiliates  was $30,842,794
based upon the closing price  ($18.20 per share) as quoted on the Nasdaq  National  Market on June 28, 2002.  Solely for
purposes of this  calculation,  the shares held by the directors and officers of the registrant are deemed to be held by
affiliates.


The
number of shares outstanding of the registrants common stock as of March 10, 2003
was 2,061,943.


DOCUMENTS INCORPORATED
BY REFERENCE


Portions of the 2002
Annual Report to Stockholders and of the Proxy Statement for the 2003 Annual Meeting of
Stockholders are incorporated by reference in Parts II and III, respectively, of this
Form 10-K.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|INDEX
|-----

|Part I   |                                                                                                   
|-------- | --------------------------------------------------------------------------------------------------
|         |                                                                                                   
|Item 1.  | Business                                                                                          
|Item 2.  | Properties                                                                                        
|Item 3.  | Legal Proceedings                                                                                 
|Item 4.  | Submission of Matters to a Vote of Securities Holders                                             
|Part II 
|Item 5.  | Market for Registrant's Common Equity and Related Stockholder Matters                             
|Item 6.  | Selected Financial Data                                                                           
|Item 7.  | Management's Discussion and Analysis of Financial Condition and     Results of Operation          
|Item 7A. | Quantitative and Qualitative Disclosures About Market Risk                                        
|Item 8.  | Financial Statements and Supplementary Data                                                       
|Item 9.  | Changes in and Disagreements With Accountants on Accounting and     Financial Disclosure          
|Part III
|Item 10. | Directors and Executive Officers of the Registrant                                                
|Item 11. | Executive Compensation                                                                            
|Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related     Stockholder Matters
|Item 13. | Certain Relationships and Related Transactions                                                    
|Part IV 
|Item 14. | Controls and Procedures                                                                           
|Item 15. | Exhibits, Financial Statement Schedules, and Reports on Form 8-K                                  

|
|

|This
report contains certain forward-looking statements within the meaning of the
federal securities laws. These statements are not historical facts, rather statements
based on First Federal Bancshares, Inc.s current expectations regarding its business
strategies, intended results and future performance. Forward-looking statements are
preceded by terms such as expects, believes,
anticipates, intends and similar expressions.


Managements
ability to predict results or the effect of future plans or strategies is inherently
uncertain. Factors which could affect actual results include interest rate trends, the
general economic climate in the market area in which First Federal Bancshares operates, as
well as nationwide, First Federal Bancshares ability to control costs and expenses,
competitive products and pricing, loan delinquency rates and changes in federal and state
legislation and regulation. These factors should be considered in evaluating the
forward-looking statements and undue reliance should not be placed on such statements.
First Federal Bancshares assumes no obligation to update any forward-looking statements.


PART I


Item 1. BUSINESS


General


First
Federal Bancshares, Inc., (also referred to as the Company or First
Federal Bancshares) was organized as a Delaware business corporation in 2000 to be
the savings and loan holding company for First Federal Bank (also referred to as the
Bank or First Federal) in connection with the conversion of First
Federal from mutual to stock form of ownership. The conversion was completed on September
27, 2000. First Federal Bancshares has no significant assets, other than all of the
outstanding shares of First Federal, and no significant liabilities. Accordingly, the
information set forth in this report, including the consolidated financial statements and
related financial data, relates primarily to First Federal.


First
Federal operates as a community-oriented financial institution, specializing in the
acceptance of retail deposits from the general public in the areas surrounding its nine
full-service banking offices and using those funds, together with funds generated from
operations and borrowings, to originate loans. The principal lending activity of First
Federal is the origination of mortgage loans for the purpose of purchasing or refinancing
one- to four-family residential property. First Federal also originates multi-family and
commercial real estate loans, residential construction loans, commercial business loans
and a variety of consumer loans. First Federal originates loans primarily for long-term
investment purposes. First Federal also invests in mortgage-backed securities, securities
issued by the U.S. Government and state and local governments, and other permissible
investments. First Federals revenues are derived principally from the generation of
interest and fees on loans originated and, to a lesser extent, interest and dividends on
investments. First Federals primary sources of funds are deposits, principal and
interest payments on loans and investments and advances from the Federal Home Loan Bank of
Chicago.


Acquisitions


On
November 22, 2002, the Company completed the acquisition of PFSB Bancorp, Inc.
(PFSB), and its wholly-owned subsidiary Palmyra Savings pursuant to an
Agreement and Plan of Merger dated as of June 4, 2002, by and between the Company and
PFSB. The acquisition was completed through the merger of PFSB with and into the Company.
As part of the acquisition, Palmyra Savings merged with and into First Federal with First
Federal being the surviving bank. First Federal Bancshares paid approximately $4.4 million
in cash and issued approximately 252,000 shares of the Companys common stock to the
former stockholders of PFSB. The PFSB acquisition included total assets of approximately
$73.8 and three banking offices in northeast Missouri.





3
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|Market Area


First
Federal conducts business from six banking offices in west central Illinois and three
banking offices in northeast Missouri. First Federals primary deposit gathering and
lending area is concentrated in the communities surrounding its nine banking offices and,
to a lesser extent, in the surrounding counties.


The
market area served by First Federal is generally rural and has an agriculturally-based
economy. Adams County, Illinois, which is home to the city of Quincy, is a regional
population and employment center for west central Illinois and northeast Missouri. Quincy
has a diverse employment base and serves as a center for education, healthcare and related
services.


Competition


First
Federal faces intense competition for the attraction of deposits and origination of loans
in its market area. Its most direct competition for deposits has historically come from
the several financial institutions operating in First Federals market area and, to a
lesser extent, from other financial service companies, such as brokerage firms, credit
unions and insurance companies. While those entities still provide a significant source of
competition for deposits, First Federal also currently faces significant competition for
deposits from the mutual fund industry as customers seek alternative sources of investment
for their funds. In this regard, First Federal also faces competition for investors
funds from their direct purchase of short-term money market securities and other corporate
and government securities. First Federals competition for loans comes primarily from
financial institutions in its market area, and to a lesser extent from other financial
service providers, such as mortgage companies and mortgage brokers. Additionally,
competition for loans has increased due to the increasing number of non-depository
financial service companies entering the mortgage market, such as insurance companies,
securities companies and specialty finance companies. First Federal expects competition to
increase in the future as a result of legislative, regulatory and technological changes
and the continuing trend of consolidation in the financial services industry.
Technological advances, for example, have lowered barriers to entry, allowed banks to
expand their geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that traditionally have
been provided by banks. The Gramm-Leach-Bliley Act, which permits affiliation among banks,
securities firms and insurance companies, also promotes a competitive environment in the
financial services industry. Some of the institutions with which First Federal competes
are significantly larger than First Federal and, therefore, have significantly greater
resources. Competition for deposits and the origination of loans could limit First
Federals growth in the future.




Lending Activities


     General.First Federals loan portfolio primarily consists of one- to
          four-family mortgage loans. To a lesser degree, First Federals loan
          portfolio also includes multi-family and commercial real estate loans,
          residential construction loans, commercial business loans and a variety of
          consumer loans. Most of First Federals borrowers are located in the
          counties where its branches are located and in the surrounding counties.


First
Federals loans are subject to federal laws and regulations. Interest rates charged
by First Federal on loans are affected principally by First Federals current
asset/liability strategy, the demand for various types of loans, the supply of money
available for lending purposes and the rates offered by competitors. These factors are, in
turn, affected by general and economic conditions, monetary policies of the federal
government, including the Federal Reserve Board, legislative tax policies and governmental
budgetary matters.





4
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|Loan
Portfolio Analysis. The following table presents the composition of First
Federals loan portfolio at the dates indicated. First Federal had no concentration
of loans exceeding 10% of total loans receivable other than as disclosed below.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                              | At December
      31, | At February
      29/28,
|------------------------------------------------------------- | --------------------- | ------------------------
|
|
|
|Real
      estate loans:                                      |                       |                         
|One-
      to four-family                                     |                       |                         
|Multi-family
      and commercial                             |                       | 24,281                  
|Construction                                                  |                       |                         
|                                                              |                       |                         
|Total
      real estate loans                                 |                       |                         
|Commercial
      loans                                        |                       |                         
|Consumer
      and other loans:                               |                       |                         
|Automobile                                                    |                       |                         
|Home
      improvement                                        |                       |                         
|Share
      loans                                             |                       |                         
|Other                                                         |                       |                         
|                                                              |                       |                         
|Total
      consumer and other loans                          |                       | 10,844                  
|                                                              |                       |                         
|Total
      loans                                             |                       |                         
|                                                              |                       |                         
|Less:                                                         |                       |                         
|Deferred
      loan origination fees      and
      discounts |                       |                         
|                                                              |                       |                         
|Allowance
      for loan losses                               |                       |                         
|                                                              |                       |                         
|Total
      loans, net                                        |                       |                         
|                                                              |                       |                         

|5
|-

|The
following table presents certain information at December 31, 2002 regarding the dollar
amount of loans maturing in First Federals portfolio based on their contractual
terms to maturity or scheduled amortization, but does not include potential prepayments.
Demand loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as becoming due in one year or less. Loan balances do not include
undisbursed loan proceeds, net deferred loan origination costs and allowance for loan
losses. Construction loans are originated as construction/permanent. Therefore, some
construction loans may have a term of longer then one year.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | At December 31, 2002
|----------------------------------- | --------------------
|
|
|Amounts due in:                     |                     
|One year or less                    |                     
|More than one year to three years   |                     
|More than three years to five years |                     
|More than five years to 10 years    |                     
|More than 10 years to 20 years      |                     
|                                    |                     
|More than 20 years                  |                     
|                                    |                     
|Total amount due                    |                     
|                                    |                     

|Scheduled contractual
principal repayments of loans do not reflect the actual life of the loans. The average
life of a loan is substantially less than its contractual term because of prepayments. In
addition, due-on-sale clauses on loans generally give First Federal the right to declare
loans immediately due and payable if, among other things, the borrower sells the real
property with the mortgage and the loan is not repaid. The average life of a mortgage loan
tends to increase, however, when current mortgage loan market rates are substantially
higher than rates on existing mortgage loans and, conversely, tends to decrease when rates
on existing mortgage loans are substantially higher than current mortgage loan market
rates.


The
following table presents the dollar amount of all loans due after December 31, 2003, which
have fixed interest rates and floating or adjustable interest rates.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Due After December 31, 2003
|--------------------------- | ---------------------------
|
|
|Real estate loans:          |                            
|One- to four-family         |                            
|Multi-family and commercial |                            
|Construction                |                            
|                            |                            
|Total real estate loans     |                            
|Consumer loans              |                            
|Commercial loans            |                            
|                            |                            
|Total loans                 |                            
|                            |                            

|One-
to Four-Family Real Estate Loans.Prior to 2002, First Federals
residential mortgage loans were primarily structured as either one-year adjustable-rate
mortgage loans or five-year balloon loans. In 2002, First Federal discontinued offering
five-year balloon loans and began offering adjustable-rate mortgage loans that adjust
annually after a five year initial fixed period. The loan fees charged, interest rates and
other provisions of First Federals mortgage loans are determined by First Federal on
the basis of its own pricing criteria and market conditions.



6
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|First
Federals adjustable-rate mortgage loans are based on an amortization schedule that
ranges from 10 to 30 years. Interest rates and payments on First Federals
adjustable-rate mortgage loans generally are adjusted annually after the initial term
based on the Federal Housing Finance Boards national average mortgage contract rate
for major lenders on the purchase of previously occupied homes. The maximum amount by
which the interest rate may be increased or decreased on First Federals
adjustable-rate mortgage loans is 2% per adjustment period and the lifetime interest rate
cap is generally 5% over the initial interest rate of the loan. First Federal qualifies
the borrower based on the borrowers ability to repay the loan based on the maximum
interest rate at the first adjustment. The terms and conditions of the adjustable-rate
mortgage loans offered by First Federal, including the index for interest rates, may vary
from time to time.


First
Federals balloon loans have a five-year term and payments based on an amortization
schedule of up to 30 years. The interest rate on First Federals balloon loans is
fixed for the term of the loan. First Federal typically notifies the borrower in writing
30 days before the end of the loan term of the maturity of the loan and that the loan must
be repaid or the term extended. In most instances, a new rate is negotiated to meet market
conditions and an extension of the loan is executed for another five-year term with an
amortization schedule equal to the original amortization term less the prior balloon
term(s). First Federal generally does not extend the loan if the borrower is delinquent or
has had a poor payment history.


First
Federal also offers 30-year fixed rate mortgage loans through the Federal Home Loan
Banks Mortgage Partnership Finance Program. Through this program, mortgage loans are
funded and owned by the Federal Home Loan Bank and serviced by First Federal.


Most
loans originated by First Federal conform to Fannie Mae and Freddie Mac underwriting
standards. However, First Federal also originates residential mortgage loans that are not
originated in accordance with the purchase requirements of Freddie Mac or Fannie Mae.
Although such loans satisfy First Federals underwriting requirements, they are
considered non-conforming because they do not satisfy collateral requirements,
income and debt ratios, acreage limits, insurance requirements or various other
requirements imposed by Freddie Mac and Fannie Mae. Accordingly, First Federals
non-conforming loans could be sold only after incurring certain costs and/or discounting
the purchase price. First Federal, however, currently does not intend to sell its loans.
First Federal has historically found that its origination of non-conforming loans has not
resulted in high amounts of non-performing loans. In addition, First Federal believes that
these loans satisfy a need in First Federals local community. As a result, First
Federal intends to continue to originate non-conforming loans.


Adjustable-rate
mortgage loans help reduce First Federals exposure to changes in interest rates. The
retention of balloon loans in First Federals loan portfolio, which through the use
of extension agreements function like adjustable-rate mortgage loans, also helps reduce
First Federals exposure to changes in interest rates. There are, however,
unquantifiable credit risks resulting from the potential of increased costs due to changed
rates to be paid by the borrower. It is possible that during periods of rising interest
rates the risk of default on adjustable-rate mortgage loans may increase as a result of
repricing and the increased payments required by the borrower. In addition, although
adjustable-rate mortgage loans make First Federals asset base more responsive to
changes in interest rates, the extent of this interest sensitivity is limited by the
annual and lifetime interest rate adjustment limits. Because of these considerations,
First Federal has no assurance that yields on adjustable-rate mortgage loans will be
sufficient to offset increases in First Federals cost of funds during periods of
rising interest rates. First Federal believes these risks, which have not had a material
adverse effect on First Federal to date, are less than the risks associated with holding
fixed-rate loans in its portfolio in a rising interest rate environment.


Multi-family
and Commercial Real Estate Loans.Most of the multi-family loans and
commercial real estate loans originated by First Federal are five-year and three-year
balloon loans with payments based on an amortization schedule of up to 20 years.
With limited exception, the maximum loan-to-value ratio for a multi-family or commercial real estate
loan is 75%. First Federal requires written appraisals prepared by an approved independent
appraiser of all properties located in Quincy, Illinois securing multi-family or
commercial real estate loans in amounts over $50,000 and all properties located in the
remainder of First Federals market area securing multi-family or commercial real
estate loans in amounts over $5,000. At December 31, 2002, First Federals commercial
real estate loans were secured by a variety of properties, including, but not limited to, retail and small
office properties, farmland and churches.


In
addition, First Federal also purchases participation interests in multi-family and
commercial real estate loans, which are generally adjustable rate loans indexed to the
prime rate with terms of up to 25 years.




7
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|Multi-family
and commercial real estate lending affords First Federal an opportunity to receive
interest at rates higher than those generally available from one- to four-family
residential lending. However, loans secured by these properties usually are greater in
amount and are more difficult to evaluate and monitor and, therefore, involve a greater
degree of risk than one- to four-family residential mortgage loans. Because payments on
loans secured by income producing properties are often dependent on the successful
operation and management of the properties, repayment of these loans may be affected by
adverse conditions in the real estate market or the economy. First Federal seeks to
minimize these risks by generally limiting the maximum loan-to-value ratio to 75% for
multi-family and commercial real estate loans and by strictly scrutinizing the financial
condition of the borrower, the cash flow of the project, the quality of the collateral and
the management of the property securing the loan. First Federal also attempts to minimize
credit risk by lending almost solely on local properties to businesses with which First
Federal is familiar. First Federal conducts a visual inspection for possible environmental
compliance concerns and requires an environmental audit with respect to manufacturing
facilities securing any loan over $200,000 and any other property where the inspection
discloses possible problems. First Federal also generally obtains personal loan guarantees
from financially capable parties.


Residential
Construction Loans.First Federal originates construction loans to
professional builders and to individuals for the construction and acquisition of personal
residences. Most of First Federals construction loans are made to individuals. First
Federals construction loans generally provide for the payment of interest only
during the construction phase, which is usually six months. In the case of loans to
individuals, at the end of the construction phase, the loan converts to a permanent
mortgage loan. Loans can be made with a maximum loan to value ratio of 80%.


Before
making a commitment to fund a construction loan, First Federal requires an appraisal of
the property by a licensed appraiser. First Federal also reviews and inspects each
property before disbursement of funds during the term of the construction loan. Loan
proceeds are disbursed after inspection based on the percentage of completion.


Construction
lending generally involves a higher degree of risk than single-family permanent mortgage
lending because of the greater potential for disagreements between borrowers and builders
and the failure of builders to pay subcontractors. Additional risk often exists because of
the inherent difficulty in estimating both a propertys value and the estimated cost
of the property. If the estimate of construction cost proves to be inaccurate, First
Federal may be required to advance funds beyond the amount originally committed to protect
the value of the property. If the estimate of value upon completion proves to be
inaccurate, First Federal may be confronted with a property whose value is insufficient to
assure full repayment. First Federal has attempted to minimize the foregoing risks by,
among other things, limiting its construction lending to residential properties, limiting
loans to builders for speculative construction projects and by having all construction
loans to individuals convert to permanent mortgage loans at the end of the construction
phase. It is also First Federals general policy to obtain regular financial
statements and tax returns from builders so that it can monitor their financial strength
and ability to repay.


Commercial
Business Loans. First Federal offers a variety of commercial lending
products that include term loans for equipment financing, term loans for business
acquisitions, inventory financing and revolving lines of credit. In most cases, fixed-rate
loans have terms up to five years and are fully amortizing. Revolving lines of credit
generally have adjustable rates of interest and are governed by a borrowing base
certificate, payable on demand, subject to annual review and renewal. Business loans with
variable rates of interest adjust on a daily basis and generally are indexed to the prime
rate as published in The Wall Street Journal. Furthermore, as circumstances
warrant, First Federal may utilize a loan agreement for commercial loans.


In
making commercial business loans, First Federal considers a number of factors, including
the financial condition of the borrower, the nature of the borrowers business,
economic conditions affecting the borrower, First Federals market area, the
management experience of the borrower, the debt service capabilities of the borrower, the
projected cash flows of the business and the collateral. Commercial loans generally are
secured by a variety of collateral, including equipment, inventory and accounts
receivable, and are supported by personal guarantees.




Unlike
mortgage loans, which generally are made on the basis of the borrowers ability to
make repayment from his or her employment or other income, and which are secured by real
property whose value tends to be more easily ascertainable, commercial loans are larger
in amount and of higher risk and typically are made on the basis of the borrowers
ability to repay the loan from the cash flow of the borrowers business. As a
result, the availability of funds for the repayment of commercial loans may be
substantially dependent on the success of the business itself. Further, any




8
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|collateral securing such loans may
depreciate over time, may be difficult to appraise and may fluctuate in value. To manage
these risks, First Federal performs a credit analysis for each commercial loan at least
annually. In addition, semi-annual credit reviews occur to continually monitor credit.


Consumer
Loans.First Federal offers a variety of consumer loans, including fully
amortized home equity loans and second mortgage loans and automobile loans.


First
Federal offers fixed-rate home improvement loans with terms up to eight years. The home
improvement loans are FHA-insured loans in amounts up to $25,000. The loan-to-value ratios
of fixed-rate home improvement loans are generally limited to 80%.


First
Federals second mortgage loans are generally either five-year, fixed-rate loans or
five-year balloon loans. First Federals second mortgages are limited to existing
First Federal customers. The underwriting standards employed by First Federal for home
equity loans and second mortgage loans include a determination of the applicants
credit history, an assessment of the applicants ability to meet existing obligations
and payments on the proposed loan and the value of the collateral securing the loan.


First
Federal also originates consumer loans secured by automobiles and, occasionally, boats and
other recreational vehicles. First Federal offers fixed-rate automobile loans with terms
of up to 60 months. Loan-to-value ratios and maximum loan terms vary depending on the age
of the vehicle.


Other
consumer loans offered by First Federal include loans secured by various personal property
and share loans. Loans secured by personal property generally have a fixed-rate and a
maximum term of five years. Share loans are secured by deposits at First Federal.


Consumer
loans entail greater risk than do residential mortgage loans, particularly in the case of
loans that are unsecured or secured by rapidly depreciating assets such as automobiles. In
these cases, any repossessed collateral for a defaulted consumer loan may not provide an
adequate source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. The remaining deficiency often does not
warrant further substantial collection efforts against the borrower beyond obtaining a
deficiency judgment. In addition, consumer loan collections are dependent on the
borrowers continuing financial stability, and thus are more likely to be adversely
affected by job loss, divorce, illness or personal bankruptcy.


Loans
to One Borrower.The maximum amount that First Federal may lend to one
borrower is limited by regulation. At December 31, 2002, First Federals regulatory
limit on loans to one borrower was $5.7 million. At that date, First Federals
largest amount of loans to one borrower, including the borrowers related interests,
was approximately $3.5 million and consisted of commercial real estate loans located
in First Federals market area. These loans were performing according to their
original terms at December 31, 2002.


Loan
Originations, Purchases and Sales.First Federals lending activities
are conducted by its employees operating through First Federals offices. First
Federal relies on advertising, referrals from realtors and customers, and personal contact
by First Federals staff to generate loan originations. First Federal does not use
loan correspondents or other third-parties to originate loans and, in recent years, has
not been an active purchaser of loans. In the past, First Federal purchased whole loans
and participation interests in commercial and residential mortgage loans through a
mortgage company in Colorado. First Federal has also participated in a small amount of
loans through a group of institutions organized to lend to businesses in the Quincy,
Illinois business district. In addition, First Federal also purchases participation
interests in multi-family and commercial real estate loans, which are generally adjustable
rate loans indexed to the prime rate with terms of up to 25 years. Except for loans
originated through the Federal Home Loan Banks Mortgage Partnership Finance Program,
First Federal generally retains for its portfolio all of the loans that it originates.




9
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|The
following table presents total loans originated, purchased and repaid during the periods
indicated.
|-------------------------------------------------------------------------------------------------------

|                                           | Year Ended December 31, | 
|------------------------------------------ | ----------------------- | 
|
|
|Loans at beginning of period               |                         | 
|Originations:                              |                         | 
|Real estate:                               |                         | 
|One- to four-family                        |                         | 
|Multi-family and commercial                |                         | 
|Construction                               |                         | 
|                                           |                         | 
|Total real estate loans                    |                         | 
|Consumer:                                  |                         | 
|Home improvement                           |                         | 
|Automobile                                 |                         | 
|Other                                      |                         | 
|                                           |                         | 
|Total consumer loans                       |                         | 
|Commercial                                 |                         | 
|                                           |                         | 
|Total loans originated                     |                         | 
|Loans acquired through acquisition of PFSB |                         | 
|Bancorp - gross                            |                         | 
|Loans purchased                            |                         | 
|Deduct:                                    |                         | 
|Principal loan repayments and prepayments  |                         | 
|Transfers to REO and repossessed assets    |                         | 
|                                           |                         | 
|Sub-total                                  |                         | 
|Net loan activity                          |                         | 
|                                           |                         | 
|Loans at end of period                     |                         | 
|                                           |                         | 

|10
|--

|Nonperforming
Assets and Delinquencies.The following table presents information with
respect to First Federals nonperforming assets at the dates indicated.
|------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | At December 31, | At February 29/28,
|---------------------------------------- | --------------- | ------------------
|
|
|Accruing loans past due 90 days or more: |                 |                   
|One- to four-family real estate          |                 |                   
|Multi-family and commercial real estate  |                 |                   
|Consumer                                 |                 |                   
|Commercial                               |                 |                   
|                                         |                 |                   
|Total                                    |                 |                   
|Non-accruing loans:                      |                 |                   
|One- to four-family real estate          |                 |                   
|Multi-family and commercial real estate  |                 |                   
|Consumer                                 |                 |                   
|Commercial                               |                 |                   
|                                         |                 |                   
|Total                                    |                 |                   
|Real estate owned (REO)                  |                 |                   
|Other repossessed assets                 |                 |                   
|                                         |                 |                   
|Total nonperforming assets               |                 |                   
|                                         |                 |                   
|Total nonperforming loans                |                 |                   
|as a percentage of total loans           |                 |                   
|Total nonperforming assets               |                 |                   
|as a percentage of total assets          |                 |                   

|Interest
income that would have been recorded for the year ended December 31, 2002 had nonaccruing
loans been current according to their original terms amounted to $17,455. Interest related
to these loans of $6,481was included in interest income for the year ended December 31,
2002.


First
Federal ceases accruing interest on loans when principal or interest payments are
delinquent 90 days or more unless the loan is adequately collateralized and in the process
of collection. Once the accrual of interest on a loan is discontinued, all interest
previously accrued is reversed against current period interest income once management
determines that interest is uncollectible.
11
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|The
following tables sets forth the delinquencies in First Federals loan portfolio as of
the dates indicated.
|--------------------------------------------------------------------------------------------------------------

|                                | At December 31,
|------------------------------- | ---------------
|
|
|
|
|Real estate loans:              |                
|One- to four-family             |                
|Multi-family and commercial     |                
|Construction                    |                
|Consumer loans:                 |                
|Home improvement                |                
|Automobile                      |                
|Other                           |                
|Commercial loans                |                
|                                |                
|Total                           |                
|                                |                
|Delinquent loans to total loans |                

|                                  | At December 31,
|--------------------------------- | ---------------
|
|
|
|
|Real estate loans:                |                
|One- to four-family               |                
|Multi-family and       commerical |                
|Construction                      |                
|Consumer loans:                   |                
|Home improvement                  |                
|Automobile                        |                
|Other                             |                
|Commercial loans                  |                
|                                  |                
|Total                             |                
|                                  |                
|Delinquent loans to total   loans |                

|Real
Estate Owned.Real estate acquired by First Federal as a result of
foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until
sold. When property is acquired it is recorded at the lower of its cost, which is the
unpaid principal balance of the loan plus foreclosure costs, or fair market value at the
date of foreclosure, establishing a new cost basis. Holding costs and declines in fair
value after acquisition of the property result in charges to expense. At December 31,
2002, First Federal had real estate owned in the amount of $277,000, consisting of single
family loans.


Asset
Classification.Federal banking regulators have adopted various regulations
and practices regarding problem assets of savings institutions. Under such regulations,
examiners have authority to identify problem assets during examinations and, if
appropriate, require them to be classified.



There
are three classifications for problem assets: substandard, doubtful and loss. Substandard
assets have one or more defined weaknesses and are characterized by the distinct
possibility that the insured institution will sustain some loss if the deficiencies are
not corrected. Doubtful assets have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in full on
the basis of currently

12
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|existing facts, conditions and
values questionable, and there is a high possibility of loss. An asset classified as loss
is considered uncollectible and of such little value that continuance as an asset of the
institution is not warranted. If an asset or portion thereof is classified as loss, the
insured institution establishes specific allowances for loan losses for the full amount
of the portion of the asset classified as loss. All or a portion of general loan loss
allowances established to cover probable losses related to assets classified substandard
or doubtful can be included in determining an institutions regulatory capital,
while specific valuation allowances for loan losses generally do not qualify as
regulatory capital. Assets that do not currently expose the insured institution to
sufficient risk to warrant classification in one of the aforementioned categories but
possess weaknesses are designated special mention. First Federal monitors
special mention assets.


The
following table presents classified assets at December 31, 2002.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                            | Loss | Doubtful | Substandard | Special Mention
|--------------------------- | ---- | -------- | ----------- | ---------------
|
|
|Real estate loans:          |      |          |             |                
|One- to four-family         |      |          | $           |               
|Multi-family and commercial |      |          |             |               
|Construction                |      |          |             |               
|Consumer loans:             |      |         
|Home improvement            |      |          |             |               
|Automobile                  |      |          |             |               
|Share loans                 |      |          |             |               
|Other                       |      |          |             |               
|Commercial loans            |      |          |             |               
|                            |      |          |             |                
|Total                       |      |          | $           |               
|                            |      |          |             |                

|Allowance
for Loan Losses.In originating loans, First Federal recognizes that losses
will be experienced on loans and that the risk of loss will vary with, among other things,
the type of loan being made, the creditworthiness of the borrower over the term of the
loan, general economic conditions and, in the case of a secured loan, the quality of the
security for the loan. First Federal maintains an allowance for loan losses to absorb
losses inherent in the loan portfolio. The allowance for loan losses represents
managements estimate of probable incurred losses based on information available as
of the date of the financial statements. The allowance for loan losses is based on
managements evaluation of the collectibility of the loan portfolio, including past
loan loss experience, known and inherent risks in the nature and volume of the portfolio,
information about specific borrower situations and estimated collateral values, and
economic conditions.


The
loan portfolio and other credit exposures are regularly reviewed by management to evaluate
the adequacy of the allowance for loan losses. The methodology for assessing the
appropriateness of the allowance includes comparison to actual losses, peer group
comparisons, industry data and economic conditions. In addition, the regulatory agencies,
as an integral part of their examination process, periodically review First Federals
allowance for loan losses. Such agencies may require First Federal to make additional
provisions for estimated losses based upon judgments different from those of management.


In
connection with assessing the allowance, loss factors are applied to various pools of
outstanding loans. First Federal segregates the loan portfolio according to risk
characteristics (i.e., mortgage loans, business, consumer). Loss factors are
derived using First Federals historical loss experience and may be adjusted for
significant factors that, in managements judgment, affect the collectibility of the
portfolio as of the evaluation date. Large dollar commercial real estate and commercial
business loans are individually evaluated for impairment and specific reserves are
allocated as needed.



In
addition, management assesses the allowance using factors that cannot be associated with
specific credit or loan categories. These factors include managements subjective
evaluation of local and national economic and business conditions, portfolio
concentration and changes in the character and size of the loan portfolio. The

13
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|allowance methodology reflects
managements objective that the overall allowance appropriately reflects a margin
for the imprecision necessarily inherent in estimates of expected credit losses.


At
December 31, 2002, First Federals allowance for loan losses represented 0.65% of
total loans and 50.89% of nonperforming loans. Although management believes that it uses
the best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of operations
could be adversely affected if circumstances differ substantially from the assumptions
used in making the determinations. Furthermore, while First Federal believes it has
established its existing allowance for loan losses in conformity with generally accepted
accounting principles, there can be no assurance that regulators, in reviewing First
Federals loan portfolio, will not request First Federal to increase its allowance
for loan losses. In addition, because future events affecting borrowers and collateral
cannot be predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the quality of
any loans deteriorate as a result of the factors discussed above. Any material increase in
the allowance for loan losses may adversely affect First Federals financial
condition and results of operations.


The
following table presents an analysis of First Federals allowance for loan losses.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                    | Year Ended
December 31, | Ten Months
Ended
December 31, | Year Ended
February 29/28,
|----------------------------------------------------------------------------------- | ----------------------- | ----------------------------- | --------------------------
|
|
|Allowance for loan losses,   beginning of period                                    |                         |                               | $                         
|Charged-off loans:                                                                  |                         |                              
|One- to four-family real estate                                                     |                         |                               |                           
|Multi-family and commercial                                                         |                         |                               |                           
|Consumer                                                                            |                         |                               |                           
|                                                                                    |                         |                               |                           
|Total charged-off loans                                                             |                         |                               |                           
|Recoveries on loans previously charged off:                                         |                         |                              
|One- to four-family real estate                                                     |                         |                               |                           
|Multi-family and commercial                                                         |                         |                               |                           
|Consumer                                                                            |                         |                               |                           
|                                                                                    |                         |                               |                           
|Total recoveries                                                                    |                         |                               |                           
|                                                                                    |                         |                               |                           
|Net recoveries (charge-offs)                                                        |                         |                               |                           
|Allowance acquired                                                                  |                         |                               |                           
|                                                                                    |                         |                               |                           
|Provision for loan losses                                                           |                         |                               |                           
|                                                                                    |                         |                               |                           
|Allowance for loan losses, end of period                                            |                         |                               | $                         
|                                                                                    |                         |                               |                           
|Allowance for loan losses to total loans                                            |                         |                               |                           
|Allowance for loan losses to nonperforming loans   and troubled debt restructurings |                         |                               |                           
|Recoveries to charge-offs                                                           |                         |                               |                           
|Net charge-offs to average loans outstanding                                        |                         |                               |                           

|14
|--

|The following
table presents the approximate allocation of the allowance for loan losses by loan
category at the dates indicated. Management believes that the allowance can be allocated
by category only on an approximate basis. The allocation of the allowance to each category
is not indicative of future losses and does not restrict the use of any of the allowance
to absorb losses in any category.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | At December 31, | 
|--------------- | --------------- | 
|
|
|
|Real estate     |                 | 
|Consumer        |                 | 
|Commercial      |                 | 
|Unallocated     |                 | 
|                |                 | 
|Total allowance |                 | 
|for loan losses |                 | 
|                |                 | 

|                | At February 28, 1999
|--------------- | --------------------
|
|
|Real estate     |                     
|Consumer        |                     
|Commercial      |                     
|Unallocated     |                     
|                |                     
|Total allowance |                     
|for loan losses |                     
|                |                     
|                |                     

|15
|--

|Investment Activities


Under
federal law, First Federal has authority to invest in various types of liquid assets,
including U.S. Government obligations, securities of various federal agencies and of state
and municipal governments, deposits at the Federal Home Loan Bank of Chicago and
certificates of deposit of federally insured institutions. Within certain regulatory
limits, First Federal may also invest a portion of its assets in corporate securities,
including non-mortgage, asset-backed instruments. Savings institutions like First Federal
are also required to maintain an investment in Federal Home Loan Bank of Chicago stock.
First Federal is required under federal regulations to maintain a minimum amount of liquid
assets.


First
Federals Board of Directors has the overall responsibility for First Federals
investment portfolio, including approval of First Federals investment policy and
appointment of First Federals Investment Committee. The Board of Directors reviews,
updates and approves First Federals investment policy at least quarterly. The Board
of Directors also reviews on at least a quarterly basis an investment activities reporting
package prepared by the Investment Committee, which provides portfolio activity, risk
levels and compliance with risk limits. The Investment Committee is responsible for
approving major policies for conducting investment activities, including the establishment
of risk limits and also ensures that management has the requisite skills to manage the
risks associated with approved investment activities. First Federals Chief Executive
Officer is authorized to make investment decisions consistent with First Federals
investment policy and the recommendations of First Federals Investment Committee and
is primarily responsible for daily investment activities. The Investment Committee
generally meets monthly with the Chief Executive Officer in order to review and determine
investment strategies and transactions.


First
Federals investment policy is designed to complement First Federals lending
activities, provide an alternative source of income through interest and dividends,
diversify First Federals assets and improve liquidity. Investment decisions are made
in accordance with First Federals investment policy and are based upon the quality
of a particular investment, its inherent risks, the composition of the balance sheet,
market expectations, First Federals liquidity, income and collateral needs and how
the investment fits within First Federals interest rate risk strategy.


The
primary objective of the investment portfolio is to maintain an adequate source of
liquidity sufficient to meet regulatory and operating requirements, and to safeguard
against deposit outflows, reduced loan amortization and increased loan demand. The
investment portfolio primarily includes debt issues and mortgage-backed securities. All of
First Federals mortgage-backed securities are issued or guaranteed by agencies of
the U.S. Government. Accordingly, they carry lower credit risk than mortgage-backed
securities of a private issuer. However, mortgage-backed securities still carry market
risk, insofar as increases in market interest rates may cause a decrease in market value,
and prepayment risk, which is risk that the securities will be repaid before maturity and
that First Federal will have to reinvest the funds at a lower interest rate.


First
Federals investment portfolio grew in 2001 and 2002 due to the low interest rate
environment. This low interest rate environment led to a higher demand for long-term,
fixed-rate loans, and caused borrowers to refinance adjustable-rate mortgage loans. First
Federal began offering fixed-rate loans in 2000 but still experienced numerous pay-offs
due to extreme competition for these loans both locally and nationally. During 2002, First
Federal originated $13.9 million of loans funded through the MPF program. This caused an
increase in liquidity at First Federal, which First Federal invested in debt and
mortgage-backed securities. As market conditions permit, First Federal intends to use
funds from the sale and maturity of securities to make new loans or retire debt.


Generally
accepted accounting principles require that securities be categorized as either held
to maturity, trading securities or available for sale, based
on managements intent as to the ultimate disposition of each security. Debt
securities may be classified as held to maturity and reported in financial
statements at amortized cost only if the reporting entity has the positive intent and
ability to hold those securities to maturity. Securities that might be sold in response
to changes in market interest rates, changes in the securitys prepayment risk,
increases in loan demand, or other similar factors cannot be classified as held to
maturity. Debt and equity securities held for current resale are classified as
trading securities. These securities are reported at fair value, and
unrealized gains and losses on the securities would be included in earnings. First
Federal does not currently use or maintain a trading

16
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|account. Debt and equity securities
not classified as either held to maturity or trading securities are
classified as available for sale. These securities are reported at fair
value, and unrealized gains and losses on the securities are excluded from earnings and
reported, net of deferred taxes, as a separate component of equity.


At
December 31, 2002, First Federal did not own any securities, other than disclosed in the
following table, that had an aggregate book value in excess of 10% of First Federals
retained earnings at that date.


The
following table presents the amortized cost and fair value of First Federals
securities, by type of security, at the dates indicated.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                | At December 31,
|----------------------------------------------- | ---------------
|
|
|
|Securities:                                     |                
|Debt securities held-to-maturity:               |                
|Obligations of U.S. government agencies         |                
|Other securities                                |                
|                                                |                
|Total                                           |                
|Debt securities available-for-sale:             |                
|Obligations of U.S. Treasury and U.S.           |                
|government agencies                             |                
|Other securities                                |                
|                                                |                
|Total                                           |                
|Equity securities available-for-sale:           |                
|FHLB stock                                      |                
|FHLMC stock                                     |                
|U.S. government mortgage securities fund        |                
|Adjustable rate mortgage securities fund        |                
|                                                |                
|Total equity securities                         |                
|available-for-sale                              |                
|                                                |                
|Total debt and equity securities                |                
|Mortgage-related securities:                    |                
|Mortgage-related securities held-to-maturity:   |                
|FHLMC                                           |                
|FNMA                                            |                
|GNMA                                            |                
|                                                |                
|Total mortgage-related securities               |                
|held-to-maturity                                |                
|Mortgage-related securities available-for-sale: |                
|FHLMC                                           |                
|FNMA                                            |                
|GNMA                                            |                
|                                                |                
|Total mortgage-related securities               |                
|available-for-sale                              |                
|                                                |                
|Total mortgage-related securities               |                
|Net unrealized gains on                         |                
|available-for-sale securities                   |                
|                                                |                
|Total securities                                |                
|                                                |                

|17
|--

|The
table below sets forth certain information regarding the carrying value, weighted average
yields and contractual maturities of First Federals debt securities and
mortgage-related securities as of December 31, 2002.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                 | At December 31, 2002
|------------------------------------------------ | --------------------
|
|
|
|Held-to-maturity securities:                     |                     
|Debt securities:                                 |                     
|Municipal securities(1)                          |                     
|Obligations of U.S.         Government  agencies |                     
|Mortgage-related securities                      |                     
|Corporate bonds                                  |                     
|                                                 |                     
|Total securities at amortized cost               |                     
|                                                 |                     
|Available-for-sale securities:                   |                     
|Debt securities:                                 |                     
|Municipals securities(1)                         |                     
|Obligations of U.S.         Government agencies  |                     
|SLMA bonds                                       |                     
|Corporate bonds                                  |                     
|Mortgage-related securities                      |                     
|                                                 |                     
|Total securities at fair value                   |                     
|                                                 |                     

_________________

|(1) | Weighted average yield for municipal securities is presented on a tax equivalent
          basis based on an assumed tax rate of 34%.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

|Deposit Activities and
Other Sources of Funds


     General.Deposits are the major external source of funds for First
          Federals lending and other investment activities. In addition, First
          Federal also generates funds internally from loan principal repayments and
          prepayments and maturing securities. Scheduled loan repayments are a relatively
          stable source of funds, while deposit inflows and outflows and loan prepayments
          are influenced significantly by general interest rates and money market
          conditions. First Federal may use borrowings from the Federal Home Loan Bank of
          Chicago to compensate for reductions in the availability of funds from other
          sources. Presently, First Federal has no other borrowing arrangements aside from
          the Federal Home Loan Bank.


Deposit
Accounts.Nearly all of First Federals depositors reside in Illinois,
Missouri, or Iowa. First Federal offers a wide variety of deposit accounts with a range of
interest rates and terms. First Federals deposit accounts consist of a variety of
savings accounts, checking and NOW accounts, certificates of deposit, individual
retirement accounts and money market accounts. The maturities of First Federals
certificate of deposit accounts range from 91 days to five years. Deposit account
terms vary with the principal differences being the minimum balance deposit, early
withdrawal penalties, limits on the number of transactions and the interest rate. First
Federal reviews its deposit mix and pricing weekly.
18
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|First
Federal believes it is competitive in the interest rates it offers on its deposit
products. First Federal determines the rates paid based on a number of factors, including
rates paid by competitors, First Federals need for funds and cost of funds,
borrowing costs and movements of market interest rates. First Federal utilizes brokers to
obtain deposits and at December 31, 2002 had $990,000 in brokered deposits.


The
following table indicates the amount of First Federals jumbo certificates of
deposits by time remaining until maturity as of December 31, 2002. Jumbo certificates of
deposits have principal balances of $100,000 or more.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Maturity Period          |  |  | Amount | Weighted
Average
Rate
|------------------------ |  |  | ------ | ---------------------
|
|Three months or less     |  |  | $      | 4,983                
|Over 3 through 6 months  |  |  |        | 4,743                
|Over 6 through 12 months |  |  |        | 5,776                
|Over 12 months           |  |  |        | 9,586                
|                         |  | 
|Total                    |  |  | $      | 25,088               
|                         |  | 

|The
following table presents the deposit activity of First Federal for the periods indicated.
|---------------------------------------------------------------------------------------------

|                                             | Year Ended December 31, | 
|-------------------------------------------- | ----------------------- | 
|
|
|Beginning balance                            |                         | 
|Increase (decrease) before interest credited |                         | 
|Assumption of deposits at fair value         |                         | 
|Interest credited                            |                         | 
|                                             |                         | 
|Net increase                                 |                         | 
|                                             |                         | 
|Ending balance                               |                         | 
|                                             |                         | 

|19
|--

|The
 following  table sets  forth the  balances  and  changes in dollar  amounts in the
 various  accounts offered by First Federal between the dates indicated.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                  | Year Ended December 31, |  |  
|--------------------------------- | ----------------------- |  | -
|
|
|
|Savings accounts                  |                         |  | $
|Money market deposits             |                         |  |  
|NOW accounts                      |                         |  |  
|Certificates maturing:            |                         | 
|Within 1 year                     |                         |  |  
|After 1 year, but within 2 years  |                         |  |  
|After 2 years, but within 5 years |                         |  |  
|                                  |                         |  |  
|Total certificates                |                         |  |  
|Noninterest-bearing deposits      |                         |  |  
|                                  |                         |  |  
|                                  |                         |  |  
|Total                             |                         |  | $
|                                  |                         |  |  

|20
|--

|Borrowings.First Federal has the ability to use advances from the Federal
          Home Loan Bank of Chicago to supplement its supply of lendable funds and to meet
          deposit withdrawal requirements. The Federal Home Loan Bank of Chicago functions
          as a central reserve bank providing credit for savings banks and certain other
          member financial institutions. As a member of the Federal Home Loan Bank of
          Chicago, First Federal is required to own capital stock in the Federal Home Loan
          Bank of Chicago and is authorized to apply for advances on the security of the
          capital stock and certain of its mortgage loans and other assets, principally
          securities that are obligations of, or guaranteed by, the U.S. Government or its
          agencies, provided certain creditworthiness standards have been met. Advances
          are made under several different credit programs. Each credit program has its
          own interest rate and range of maturities. Depending on the program, limitations
          on the amount of advances are based on the financial condition of the member
          institution and the adequacy of collateral pledged to secure the credit. At
          December 31, 2002, First Federal had the ability to borrow a total of
          approximately $22.4 million from the Federal Home Loan Bank of Chicago.


The
following tables presents certain information regarding First Federals use of
Federal Home Loan Bank of Chicago advances during the periods indicated.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                   | Year Ended December 31, | 
|------------------------------------------------------------------ | ----------------------- | 
|
|
|FHLB advances and other borrowings:                                |                         | 
|Average balance outstanding                                        |                         | 
|Maximum amount outstanding at any month-end      during the period |                         | 
|Balance outstanding at end of period                               |                         | 
|Weighted average interest rate during the period                   |                         | 
|Weighted average interest rate at end of period                    |                         | 

|Subsidiary Activities


First
Federal Bancshares sole subsidiary is First Federal Bank. First Federal has one
subsidiary, P S A Service Corporation which was acquired in connection with
the PFSB acquisition. In 1981, Palmyra Savings formed P S A Service Corporation as a
wholly owned subsidiary to sell mortgage life insurance to Palmyra Savings
borrowers. P S A Service Corporation also offers safe deposit box services
in First Federals Canton and Kahoka branch offices. Under Office of Thrift
Supervision regulations, First Federal generally may invest up to 3% of its assets in
service corporations, provided that at least one-half of investment in excess of 1% is
used primarily for community, inner-city and community development projects.


Personnel


As
of December 31, 2002, First Federal had 68 full-time employees and 13 part-time employees,
none of whom is represented by a collective bargaining unit. First Federal believes its
relationship with its employees is good.


REGULATION AND
SUPERVISION


General



As
a savings and loan holding company, First Federal Bancshares is required by federal law
to report to, and otherwise comply with, the rules and regulations of the Office of
Thrift Supervision. First Federal is subject to extensive regulation, examination and
supervision by the Office of Thrift Supervision, as its primary federal regulator, and
the Federal Deposit Insurance Corporation, as the deposit insurer. First Federal is a
member of the Federal Home Loan Bank System and, with respect to deposit insurance, of
the Savings Association Insurance Fund managed by the Federal Deposit Insurance
Corporation. First Federal must file reports with the Office of Thrift Supervision and
21
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|the Federal Deposit Insurance
Corporation concerning its activities and financial condition in addition to obtaining
regulatory approvals prior to entering into certain transactions such as mergers with, or
acquisitions of, other savings institutions. The Office of Thrift Supervision and/or the
Federal Deposit Insurance Corporation conduct periodic examinations to test First Federals
safety and soundness and compliance with various regulatory requirements. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the insurance fund
and depositors. The regulatory structure also gives the regulatory authorities extensive
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies with respect to the classification of assets and
the establishment of adequate loan loss reserves for regulatory purposes. Any change in
such regulatory requirements and policies, whether by the Office of Thrift Supervision,
the Federal Deposit Insurance Corporation or the Congress, could have a material adverse
impact on the Company, First Federal and their operations. Certain of the regulatory
requirements applicable to First Federal and to First Federal Bancshares are referred to
below or elsewhere herein. The description of statutory provisions and regulations
applicable to savings institutions and their holding companies set forth in this Form
10-K does not purport to be a complete description of such statutes and regulations and
their effects on First Federal and First Federal Bancshares.


Holding Company
Regulation


First
Federal Bancshares is a nondiversified unitary savings and loan holding company within the
meaning of federal law. Under prior law, a unitary savings and loan holding company, such
as First Federal Bancshares was not generally restricted as to the types of business
activities in which it may engage, provided that First Federal continued to be a qualified
thrift lender. See Federal Savings Institution Regulation  Qualified Thrift
Lender Test. The Gramm-Leach-Bliley Act of 1999 provides that no company may
acquire control of a savings association after May 4, 1999 unless it engages only in the
financial activities permitted for financial holding companies under the law or for
multiple savings and loan holding companies as described below. Further, the
Gramm-Leach-Bliley Act specifies that existing savings and loan holding companies may only
engage in such activities. The Gramm-Leach-Bliley Act, however, grandfathered the
unrestricted authority for activities with respect to unitary savings and loan holding
companies existing prior to May 4, 1999, so long as its subsidiary savings institution
continues to comply with the QTL Test. First Federal Bancshares does not qualify for the
grandfather and is limited to such activities. Upon any non-supervisory acquisition by
First Federal Bancshares of another savings institution or savings bank that meets the
qualified thrift lender test and is deemed to be a savings institution by the Office of
Thrift Supervision, First Federal Bancshares would become a multiple savings and loan
holding company (if the acquired institution is held as a separate subsidiary) and would
generally be limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of
Thrift Supervision, and certain activities authorized by Office of Thrift Supervision
regulation. However, the Office of Thrift Supervision has issued an interpretation
concluding that the multiple savings and loan holding companies may also engage in
activities permitted for financial holding companies.


A
savings and loan holding company is prohibited from, directly or indirectly, acquiring
more than 5% of the voting stock of another savings institution or savings and loan
holding company without prior written approval of the Office of Thrift Supervision and
from acquiring or retaining control of a depository institution that is not insured by the
Federal Deposit Insurance Corporation. In evaluating applications by holding companies to
acquire savings institutions, the Office of Thrift Supervision considers the financial and
managerial resources and future prospects of First Federal Bancshares and institution
involved, the effect of the acquisition on the risk to the deposit insurance funds, the
convenience and needs of the community and competitive factors.


The
Office of Thrift Supervision may not approve any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a savings
institution in another state if the laws of the state of the target savings institution
specifically permit such acquisitions. The states vary in the extent to which they permit
interstate savings and loan holding company acquisitions.

22
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Although
savings and loan holding companies are not currently subject to specific capital
requirements or specific restrictions on the payment of dividends or other capital
distributions, federal regulations do prescribe such restrictions on subsidiary savings
institutions as described below. First Federal must notify the Office of Thrift
Supervision 30 days before declaring any dividend to First Federal Bancshares. In
addition, the financial impact of a holding company on its subsidiary institution is a
matter that is evaluated by the Office of Thrift Supervision and the agency has authority
to order cessation of activities or divestiture of subsidiaries deemed to pose a threat to
the safety and soundness of the institution.


Acquisition
of the Holding Company.Under the Federal Change in Bank Control Act, a notice
must be submitted to the Office of Thrift Supervision if any person (including a company),
or group acting in concert, seeks to acquire 10% or more of First Federal Bancshares
outstanding voting stock, unless the Office of Thrift Supervision has found that the
acquisition will not result in a change of control of First Federal Bancshares. Under the
Federal Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the
filing of a complete notice to act, taking into consideration certain factors, including
the financial and managerial resources of the acquirer and the anti-trust effects of the
acquisition. Any company that acquires control would then be subject to regulation as a
savings and loan holding company.


Federal Savings
Institution Regulation


Business
Activities. The activities of federal savings institutions are governed by
federal law and regulations. These laws and regulations delineate the nature and extent of
the activities in which federal associations may engage. In particular, certain lending
authority for federal association, e.g., commercial, non-residential real property
loans and consumer loans, is limited to a specified percentage of the institutions
capital or assets.


Capital
Requirements. The Office of Thrift Supervision capital regulations require
savings institutions to meet three minimum capital standards: a 1.5% tangible capital to
total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating
on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition,
the prompt corrective action standards discussed below also establish, in effect, a
minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving
the highest CAMELS rating), and, together with the risk-based capital standard itself, a
4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also
require that, in meeting the tangible, leverage and risk-based capital standards,
institutions must generally deduct investments in and loans to subsidiaries engaged in
activities as principal that are not permissible for a national bank.


The
risk-based capital standard for savings institutions requires the maintenance of Tier 1
(core) and total capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet assets, are
multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift
Supervision capital regulation based on the risks believed inherent in the type of asset.
Core (Tier 1) capital is defined as common stockholders equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus, and
minority interests in equity accounts of consolidated subsidiaries less intangibles other
than certain mortgage servicing rights and credit card relationships. The components of
supplementary capital currently include cumulative preferred stock, long-term perpetual
preferred stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity
securities with readily determinable fair market values. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of core
capital. The Office of Thrift Supervision also has authority to establish individual
minimum capital requirements in appropriate cases upon a determination that an
institutions capital level is or may become inadequate in light of the particular
circumstances. At December 31, 2002, First Federal met each of its capital requirements.



Prompt
Corrective Regulatory Action. The Office of Thrift Supervision is required
to take certain supervisory actions against undercapitalized institutions, the severity
of which depends upon the institutions
23
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|degree of undercapitalization.
Generally, a savings institution that has a ratio of total capital to risk weighted
assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less
than 4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be undercapitalized. A
savings institution that has a total risk-based capital ratio less than 6%, a Tier 1
capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to
be significantly undercapitalized and a savings institution that has a
tangible capital to assets ratio equal to or less than 2% is deemed to be critically
undercapitalized. Subject to a narrow exception, the Office of Thrift Supervision
is required to appoint a receiver or conservator for an institution that is critically
undercapitalized. The regulation also provides that a capital restoration plan must
be filed with the Office of Thrift Supervision within 45 days of the date a savings
institution receives notice that it is undercapitalized, significantly
undercapitalized or critically undercapitalized. Compliance with the
plan must be guaranteed by any parent holding company. In addition, numerous mandatory
supervisory actions become immediately applicable to an undercapitalized institution,
including, but not limited to, increased monitoring by regulators and restrictions on
growth, capital distributions and expansion. The Office of Thrift Supervision could also
take any one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and directors.


Insurance
of Deposit Accounts. First Federal is a member of the Savings Association
Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based
assessment system by which institutions are assigned to one of three categories based on
their capitalization and one of three subcategories based on examination ratings and other
supervisory information. An institutions assessment rate depends upon the categories
to which it is assigned. Assessment rates for Savings Association Insurance Fund member
institutions are determined semiannually by the Federal Deposit Insurance Corporation and
currently range from zero basis points for the healthiest institutions to 27 basis points
for the riskiest. The FDIC has authority to increase insurance assessments. A significant
increase in Savings Association Insurance Fund insurance premiums would likely have an
adverse effect on the operating expenses and results of operations of First Federal.
Management cannot predict what insurance assessment rates will be in the future.


In
addition to the assessment for deposit insurance, institutions are required to make
payments on bonds issued in the late 1980s by the Financing Corporation (FICO)
to recapitalize the predecessor to the Savings Association Insurance Fund. During fiscal
2002, FICO payments for Savings Association Insurance Fund members approximated 1.75 basis
points of assessable deposits.


Insurance
of deposits may be terminated by the Federal Deposit Insurance Corporation upon a finding
that the institution has engaged in unsafe or unsound practices, is in an unsafe or
unsound condition to continue operations or has violated any applicable law, regulation,
rule, order or condition imposed by the Federal Deposit Insurance Corporation or the
Office of Thrift Supervision. The management of First Federal does not know of any
practice, condition or violation that might lead to termination of deposit insurance.


Loans
to One Borrower. Federal law provides that savings institutions are
generally subject to the limits on loans to one borrower applicable to national banks. A
savings institution may not make a loan or extend credit to a single or related group of
borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may
be lent, equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral.


Qualified
Thrift Lender Test. The Home Owners Loan Act requires savings
institutions to meet a qualified thrift lender test. Under the test, a savings association
is required to either qualify as a domestic building and loan association
under the Internal Revenue Code or maintain at least 65% of its portfolio
assets (total assets less: (i) specified liquid assets up to 20% of total assets;
(ii) intangibles, including goodwill; and (iii) the value of property used to conduct
business) in certain qualified thrift investments (primarily residential
mortgages and related investments, including certain mortgage-backed securities) in at
least 9 months out of each 12 month period.


A
savings institution that fails the qualified thrift lender test is subject to certain
operating restrictions and may be required to convert to a bank charter. As of December
31, 2002, First Federal met the qualified thrift lender test. Recent legislation has
expanded the extent to which education loans, credit card loans and small business loans
may be considered qualified thrift investments.

24
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Limitation
on Capital Distributions. Office of Thrift Supervision regulations impose
limitations upon all capital distributions by a savings institution, including cash
dividends, payments to repurchase its shares and payments to shareholders of another
institution in a cash-out merger. Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required prior to any capital distribution
if the institution does not meet the criteria for expedited treatment of
applications under Office of Thrift Supervision regulations (i.e., generally,
examination ratings in the two top categories), the total capital distributions for the
calendar year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute, regulation or
agreement with Office of Thrift Supervision. If an application is not required, the
institution must still provide prior notice to Office of Thrift Supervision of the capital
distribution if, like First Federal, it is a subsidiary of a holding company. In the event
First Federals capital fell below its regulatory requirements or the Office of
Thrift Supervision notified it that it was in need of more than normal supervision, First
Federals ability to make capital distributions could be restricted. In addition, the
Office of Thrift Supervision could prohibit a proposed capital distribution by any
institution, which would otherwise be permitted by the regulation, if the Office of Thrift
Supervision determines that such distribution would constitute an unsafe or unsound
practice.


Transactions
with Related Parties. First Federals authority to engage in
transactions with affiliates (e.g., any company that controls or is
under common control with an institution, including First Federal Bancshares and its
non-savings institution subsidiaries) is limited by federal law. The aggregate amount of
covered transactions with any individual affiliate is limited to 10% of the capital and
surplus of the savings institution. The aggregate amount of covered transactions with all
affiliates is limited to 20% of the savings institutions capital and surplus.
Certain transactions with affiliates are required to be secured by collateral in an amount
and of a type described in federal law. The purchase of low quality assets from affiliates
is generally prohibited. The transactions with affiliates must be on terms and under
circumstances, that are at least as favorable to the institution as those prevailing at
the time for comparable transactions with non-affiliated companies. In addition, savings
institutions are prohibited from lending to any affiliate that is engaged in activities
that are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.


The
recently enacted Sarbanes Oxley Act generally prohibits loans by the Company to its
executive officers and directors. However, that act contains a specific exception for
loans by federally insured depository institutions to its executive officers and
directors in compliance with federal banking laws. Under such laws First Federals
authority to extend credit to executive officers, directors and 10% shareholders
(insiders), as well as entities such persons control, is limited. The law
limits both the individual and aggregate amount of loans First Federal may make to
insiders based, in part, on First Federals capital position and requires certain
board approval procedures to be followed. Such loans are required to be made on terms
substantially the same as those offered to unaffiliated individuals and not involve more
than the normal risk of repayment. There is an exception for loans made pursuant to a
benefit or compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.


Enforcement.The
Office of Thrift Supervision has primary enforcement responsibility over savings
institutions and has the authority to bring actions against the institution and
all institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The Federal Deposit
Insurance Corporation has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action to be taken with respect to
a particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
certain circumstances. Federal law also establishes criminal penalties for
certain violations.


Standards
for Safety and Soundness.The federal banking agencies have adopted Interagency
Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the
safety and soundness standards that

25
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|the federal banking agencies use to
identify and address problems at insured depository institutions before capital becomes
impaired. If the Office of Thrift Supervision determines that a savings institution fails
to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may
require the institution to submit an acceptable plan to achieve compliance with the
standard.


Federal Home Loan Bank
System




First
Federal is a member of the Federal Home Loan Bank System, which consists of 12 regional
Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility
primarily for member institutions. First Federal, as a member of the Federal Home Loan
Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid
residential mortgage loans and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. First
Federal was in compliance with this requirement with an investment in Federal Home Loan
Bank stock at December 31, 2002 of $1.1 million.


The
Federal Home Loan Banks are required to provide funds for the resolution of insolvent
thrifts in the late 1980s and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to
their members and could also result in the Federal Home Loan Banks imposing a higher rate
of interest on advances to their members. If dividends were reduced, or interest on future
Federal Home Loan Bank advances increased, First Federals net interest income would
likely also be reduced. Recent legislation has changed the structure of the Federal Home
Loan Banks funding obligations for insolvent thrifts, revised the capital structure of the
Federal Home Loan Banks and implemented entirely voluntary membership for Federal Home
Loan Banks. Management cannot predict the effect that these changes may have with respect
to its Federal Home Loan Bank membership.


Federal Reserve System


The
Federal Reserve Board regulations require savings institutions to maintain non-interest
earning reserves against their transaction accounts (primarily NOW and regular checking
accounts). The regulations generally provide that reserves be maintained against aggregate
transaction accounts as follows: a 3% reserve ratio is assessed on net transaction
accounts up to and including $42.1 million; a 10% reserve ratio is applied above $42.1
million. The first $6.0 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The
amounts are adjusted annually. First Federal complies with the foregoing requirements.


FEDERAL AND STATE
TAXATION


Federal Income Taxation


     General.
          First Federal Bancshares and First Federal Bank report their income on a
          calendar year basis using the accrual method of accounting. The federal income
          tax laws apply to First Federal Bancshares and First Federal Bank in the same
          manner as to other corporations with some exceptions, including particularly
          First Federal Banks reserve for bad debts discussed below. The following
          discussion of tax matters is intended only as a summary and does not purport to
          be a comprehensive description of the tax rules applicable to First Federal Bank
          or First Federal Bancshares. First Federal Banks federal income tax
          returns have been either audited or closed under the statute of limitations
          through tax year 1997. For its 2002 tax year, First Federals maximum
          federal income tax rate was 34%.


Bad
Debt Reserves.For fiscal years beginning before December 31, 1995,
thrift institutions that qualified under certain definitional tests and other conditions
of the Internal Revenue Code were permitted to use certain favorable provisions to
calculate their deductions from taxable income for annual additions to their bad debt
reserve. A reserve could be established for bad debts on qualifying real property loans,
generally secured by interests in real property improved or to be improved, under the
percentage of taxable income method or the experience method. The reserve for
nonqualifying loans was computed using the experience method.

26
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|Federal
legislation enacted in 1996 repealed the reserve method of accounting for bad debts and
the percentage of taxable income method for tax years beginning after 1995 and require
savings institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $2.3 million of First Federal Banks
accumulated bad debt reserves would not be recaptured into taxable income unless First
Federal Bank makes a non-dividend distribution to First Federal Bancshares as
described below.



     Distributions.
          If First Federal Bank makes non-dividend distributions to First
          Federal Bancshares, they will be considered to have been made from First Federal
          Banks unrecaptured tax bad debt reserves, including the balance of its
          reserves as of February 28, 1988, to the extent of the non-dividend
          distributions, and then from First Federal Banks supplemental
          reserve for losses on loans, to the extent of those reserves, and an amount
          based on the amount distributed, but not more than the amount of those reserves,
          will be included in First Federal Banks taxable income. Non-dividend
          distributions include distributions in excess of First Federal Banks
          current and accumulated earnings and profits, as calculated for federal income
          tax purposes, distributions in redemption of stock, and distributions in partial
          or complete liquidation. Dividends paid out of First Federal Banks current
          or accumulated earnings and profits will not be so included in taxable income.


The
amount of additional taxable income triggered by a non-dividend is an amount that, when
reduced by the tax attributable to the income, is equal to the amount of the distribution.
Therefore, if First Federal Bank makes a non-dividend distribution to First Federal
Bancshares, approximately one and one-half times the amount of the distribution not in
excess of the amount of the reserves would be includable in income for federal income tax
purposes, assuming a 34% federal corporate income tax rate. First Federal Bank does not
intend to pay dividends that would result in a recapture of any portion of its bad debt
reserves.


State Taxation


Illinois
State Taxation. First Federal Bancshares and First Federal Bank are
required to file Illinois income tax returns and pay tax at an effective tax rate of 7.18%
of Illinois taxable income apportioned to Illinois. For these purposes, Illinois taxable
income generally means federal taxable income subject to certain modifications, the
primary one of which is the exclusion of interest income on United States obligations.


Delaware
State Taxation.As a Delaware holding company not earning income in
Delaware, First Federal Bancshares is exempt from Delaware corporate income tax, but is
required to file an annual report with and pay an annual franchise tax to the State of
Delaware.


Missouri
State Taxation.First Federal Bancshares and First Federal Bank are
required to file Missouri income tax returns and pay tax at an effective tax rate of 7% of
taxable income apportioned to Missouri. For these purposes, Missouri taxable income
generally means federal taxable income subject to certain modifications for Missouri
purposes, primarily the exclusion of interest income on United States Obligations.


EXECUTIVE OFFICERS OF
THE REGISTRANT


The
following sets forth certain information regarding the executive officers and key
employees of the Company and First Federal who are not also directors. The following
individuals are elected annually and hold office until their successors have been elected
and qualified or until they are removed or replaced. Ages are as of March 1, 2003.


Peggy
L. Higgins has served as Assistant Treasurer of the Company and Treasurer
of First Federal since 2000. Ms. Higgins has also served as Senior Vice President of First
Federal since 1998. Prior to becoming Senior Vice President, Ms. Higgins served as a
Vice President. She has been affiliated with First Federal since 1976. Age 49.


27
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Cathy
D. Pendell has served as Treasurer of the Company and Senior Vice President
of First Federal since 2000 and 1998, respectively. Ms. Pendell was named Chief Financial
Officer of First Federal in 2002. Prior to becoming Chief Financial Officer,
Ms. Pendell served as a Senior Vice President. She has been affiliated with First
Federal since 1976. Ms. Pendell is a certified public accountant. Age 43.


Millie
R. Shields has served as Senior Vice President of First Federal since 1998.
Prior to becoming Senior Vice President, Ms. Shields served as a Vice President. She
has been affiliated with First Federal since 1978. Age 43.


Ronald
A. Feld has served as Secretary of the Company and Vice President and
Secretary of First Federal since 2000, 1987 and 1990, respectively. In 1995, Mr. Feld
became Branch Manager of First Federals Colchester office. He has been affiliated
with First Federal since 1984. Age 60.


Mark
A. Tyrpin joined First Federal in September 1999 as Vice President and
head of the commercial loan department. From 1990 until joining First Federal,
Mr. Tyrpin was with Bank of America (formerly, NationsBank), most recently with the
title of Vice President/Commercial Loan Manager. Age 37.


ITEM 2. PROPERTIES


Properties


First
Federal currently conducts its business through its main office located in Colchester,
Illinois, and eight other full-service banking offices, all of which it owns.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Location                     | Year
Acquired | Net Book Value
of Property at
December 31, 2002
|---------------------------- | ------------- | -----------------------------------------------
|
|109 East Depot Street        |               |                                                
|Colchester, Illinois 62326   |               |                                                
|                             |               |                                                
|2001 Maine Street            |               |                                                
|Quincy, Illinois 62301       |               |                                                
|                             |               |                                                
|101 North 36th Street        |               |                                                
|Quincy, Illinois 62301       |               |                                                
|                             |               |                                                
|201 West Main Street         |               |                                                
|Mt. Sterling, Illinois 62353 |               |                                                
|                             |               |                                                
|430 West Jackson Street      |               |                                                
|Macomb, Illinois 61455       |               |                                                
|                             |               |                                                
|190 East Hurst Street        |               |                                                
|Bushnell, Illinois 61422     |               |                                                
|                             |               |                                                
|123 West Lafayette Street    |               |                                                
|Palmyra, Missouri 63461      |               |                                                
|                             |               |                                                
|600 Washington Street        |               |                                                
|Canton, Missouri 63435       |               |                                                
|                             |               |                                                
|180 S. Johnson Street        |               |                                                
|Kahoka, Missouri 63445       |               |                                                

|28
|--

|ITEM 3.  LEGAL PROCEEDINGS


First
Federal Bancshares is not a party to any pending legal proceedings. Periodically, there
have been various claims and lawsuits involving First Federal Bank, such as claims to
enforce liens, condemnation proceedings on properties in which First Federal Bank holds
security interests, claims involving the making and servicing of real property loans and
other issues incident to First Federal Banks business. First Federal Bank is not a
party to any pending legal proceedings that it believes would have a material adverse
effect on the financial condition or operations of First Federal Bank.



ITEM 4.  SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS


None.


PART II


ITEM 5.  MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


The
information regarding the market for First Federal Bancshares common equity and
related stockholder matters is incorporated herein by reference to First Federal
Bancshares 2002 Annual Report to Stockholders at Investor and Corporate
Information.


ITEM 6.  SELECTED
FINANCIAL DATA


The
information required by this item is incorporated herein by reference to the Section
captioned Selected Consolidated Financial Information in the 2002 Annual
Report to Stockholders.


ITEM 7.  MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND                 RESULTS OF OPERATION


The
information regarding managements discussion and analysis of financial condition and
results of operation is incorporated herein by reference to First Federal Bancshares
2002 Annual Report to Stockholders at Managements Discussion and Analysis of
Financial Condition and Results of Operations.


ITEM 7A.  QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


The
information required by this item is incorporated herein by reference to the Section
captioned Managements Discussion and Analysis of Financial Condition and
Results of Operations in the 2002 Annual Report to Stockholders.


ITEM 8.  FINANCIAL
STATEMENTS AND SUPPLEMENTAL DATA


The
information regarding financial statements is incorporated herein by reference to First
Federal Bancshares 2002 Annual Report to Stockholders in the Consolidated Financial
Statements and the Notes thereto.


ITEM 9.  CHANGE IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND                 FINANCIAL DISCLOSURE


None.

29
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART III


ITEM 10.  DIRECTORS AND
EXECUTIVE OFFICERS OF THE REGISTRANT


The
information relating to the directors and officers of First Federal Bancshares and
information regarding compliance with Section 16(a) of the Exchange Act is incorporated
herein by reference to First Federal Bancshares Proxy Statement for the 2003 Annual
Meeting of Stockholders and to Part I, Item 1, Description of Business 
Executive Officers of the Registrant.



ITEM 11.  EXECUTIVE
COMPENSATION


The
information regarding executive compensation is incorporated herein by reference to First
Federal Bancshares Proxy Statement for the 2003 Annual Meeting of Stockholders.


ITEM 12.  SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND                    MANAGEMENT AND RELATED STOCKHOLDERS MATTERS


Equity Compensation Plan
Information as of December 31, 2002


The
information relating to security ownership of certain beneficial owners and management is
incorporated herein by reference to First Federal Bancshares Proxy Statement for the
2003 Annual Meeting of Stockholders.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | 
|-------------------------- | 
|
|
|                           | 
|Equity compensation        | 
|plans approved by security | 
|holders                    | 
|                           | 
|Equity compensation        | 
|plans not approved by      | 
|security holders           | 
|                           | 
|Total                      | 
|                           | 

|ITEM 13.  CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS


The
information relating to certain relationships and related transactions is incorporated
herein by reference to First Federal Bancshares Proxy Statement for the 2003 Annual
Meeting of Stockholders.
30
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|PART IV


Item 14.  CONTROLS AND
PROCEDURES


(a) Evaluation of
disclosure controls and procedures. The Company maintains controls and
procedures designed to ensure that information required to be disclosed in the
reports that the Company files or submits under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
Based upon their evaluation of those controls and procedures performed within 90
days of the filing date of this report, the chief executive officer and the
chief financial officer of the Company concluded that the Companys
disclosure controls and procedures were adequate.



(b) 
Changes in internal controls. The Company made no significant changes in
its internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation of those controls by the chief
executive officer.


ITEM 15.  EXHIBITS,
FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) | (1) |  | The
 following  are filed as a part of this  report by means of  incorporation  to First
                           Federal Bancshares 2003 Annual Report to Stockholders:
| | --- | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Report
of Independent Auditors
|- |  | ------------------------------

|o |  | Consolidated
 Statements  of  Financial  Condition  as of December 31, 2002 and
                                    December 31, 2001
|- |  | -------------------------------------------------------------------------------------------------------------------------------------

|o |  | Consolidated
 Statements  of Income for the Years Ended  December 31,  2002 and
                                    2001 and the Ten Months Ended December 31, 2000
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Consolidated
 Statements of Changes in Shareholders' Equity for the Years Ended
                                    December 31, 2002 and 2001 and the Ten Months Ended
December 31, 2000
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Consolidated
 Statements  of Cash Flows for the Years Ended  December 31,  2002
                                    and 2001 and the Ten Months Ended December 31, 2000
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o |  | Notes
to Consolidated Financial Statements
|- |  | ------------------------------------------

| |  | (2) |  | All
 financial  statement  schedules  are  omitted  because  they  are not  required  or
                           applicable,  or  the  required  information  is  shown  in
 the  consolidated  financial                            statements or the notes thereto.
| |  | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | (3) |  | Exhibits
| |  | --- |  | --------

| |  |  | 3.1 |  | Certificate
of Incorporation of First Federal Bancshares, Inc.(1)
| |  |  | --- |  | -----------------------------------------------------------------

| |  |  | 3.2 |  | Bylaws
of First Federal Bancshares, Inc.(2)
| |  |  | --- |  | -------------------------------------------

| |  |  | 4.0 |  | Specimen
Stock Certificate of First Federal Bancshares, Inc.(1)
| |  |  | --- |  | ---------------------------------------------------------------

| |  |  | 10.1 |  | Employment
 Agreement between First Federal Bancshares,  Inc. and James J. Stebor (3)
| |  |  | ---- |  | -------------------------------------------------------------------------------------

| |  |  | 10.2 |  | Employment
 Agreement  between  First  Federal Bank and James J. Stebor (3)
| |  |  | ---- |  | ---------------------------------------------------------------------------

| |  |  | 10.3 |  | First
Federal Bank Supplemental Executive Retirement Plan (3)
| |  |  | ---- |  | -------------------------------------------------------------

| |  |  | 10.4 |  | First
Federal Bank Employee Severance Compensation Plan (3)
| |  |  | ---- |  | -----------------------------------------------------------

| |  |  | 10.5 |  | First
Federal Bancshares, Inc. 2001 Stock Based Incentive Plan (4)
| |  |  | ---- |  | ------------------------------------------------------------------

|31
|--

| |  |  | 10.6 |  | Non-Competition
and Consulting  Agreement by and between First Federal Bank and Eldon R. Mette
| |  |  | ---- |  | ----------------------------------------------------------------------------------------------

| |  |  | 10.7 |  | PFSB
Bancorp, Inc. 2000 Stock-Based Incentive Plan (5)
| |  |  | ---- |  | ------------------------------------------------------

| |  |  | 13.0 |  | Portions
of the Annual Report to Stockholders
| |  |  | ---- |  | ---------------------------------------------

| |  |  | 21.0 |  | List
of Subsidiaries
| |  |  | ---- |  | --------------------

| |  |  | 23.0 |  | Consent
of Crowe Chizek and Company LLC
| |  |  | ---- |  | ---------------------------------------

| |  |  | 99.0 |  | Certifications
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
| |  |  | ---- |  | ------------------------------------------------------------------------

_________________

| |  |  | (1) |  | Incorporated
herein by reference from the Exhibits to Form SB-2, Registration Statement and
amendments thereto, initially filed on May 5, 2000, Registration No. 333-36368.
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  |  | (2) |  | Incorporated
 herein by  reference  from the  Exhibits to the Annual  Report on
Form 10-KSB, filed on March 28, 2001.
| |  |  | --- |  | ---------------------------------------------------------------------------------------------------------------------

| |  |  | (3) |  | Incorporated
 herein by reference from the Exhibits to the Quarterly  Report on
Form 10-QSB filed on November 14, 2000.
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------

| |  |  | (4) |  | Incorporated
 herein by  reference  from the  Exhibits to the  Quarterly  Report on Form  10-QSB
filed on August 13, 2001.
| |  |  | --- |  | --------------------------------------------------------------------------------------------------------------------------

| |  |  | (5) |  | Incorporated
by reference to PFSB Bancorp,  Inc.'s Registration  Statement on From S-8 (SEC No.
333-35020) filed on April 18, 2000.
| |  |  | --- |  | -----------------------------------------------------------------------------------------------------------------------------------

| | (b) |  |  | Reports
on Form 8-K
| | --- |  |  | -------------------

|On
 November  25,  2002,  the  Company  filed a Form 8-K in which it  announced  under Item
2 the consummation of its acquisition of PFSB Bancorp, Inc.

32
|-----------------------------------------------------------------------------------------------------------------------------------------------------------

|SIGNATURES


In
accordance  with Section 13 or 15(d) of the  Securities  Exchange Act of 1934,  the
 Registrant  caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                     | FIRST FEDERAL BANCSHARES, INC.                                          
|-------------------- | ------------------------------------------------------------------------
|                    
|Date: April 10, 2003 | /s/ James J. SteborJames J. Stebor
President and Chief Executive Officer
|                    

|In
 accordance  with the  Exchange  Act,  this report has been signed  below by the
 following  persons on behalf of the Registrant and in the capacities and on the dates
indicated.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Name                     | Title | Date
|------------------------ | ----- | ----
|/s/ James J. Stebor      |       |     
|James J. Stebor          |       |     
|/s/ Cathy D. Pendell     |       |     
|Cathy D. Pendell         |       |     
|/s/ Franklin M. Hartzell |       |     
|Franklin M. Hartzell     |       |     
|/s/ Stephan L. Roth      |       |     
|Stephan L. Roth          |       |     
|_____________________    |       |     
|Richard D. Stephens      |       |     
|_____________________    |       |     
|Murrel Hollis            |       |     
|_____________________    |       |     
|Gerald L. Prunty         |       |     
|/s/ B. Bradford Billings |       |     
|B. Bradford Billings     |       |     
|/s/ Eldon R. Mette       |       |     
|Eldon R. Mette           |       |     

---

|CERTIFICATIONS


I,  James J. Stebor, President and
Chief Executive Officer, of First Federal Bancshares, Inc., certify that:
|-----------------------------------------------------------------------------------------------------------------------------

|(1) |  | I
have reviewed this annual report on Form 10-K of First Federal Bancshares,
               Inc.;
|--- |  | -------------------------------------------------------------------------------------------------

|(2) |  | Based
on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements
were                made, not misleading with respect to the period covered by this
annual report;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Based
on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects
the                financial condition, results of operations and cash flows of the
registrant as                of, and for, the periods presented in this annual report;
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The
registrants other certifying officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as
defined in                Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) |  | designed
such disclosure controls and procedures to ensure that material
                    information relating to the registrant, including its consolidated
subsidiaries,                     is made known to us by others within those entities,
particularly during the                     period in which this annual report is being
prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | evaluated
the effectiveness of the registrants disclosure controls and
                    procedures as of a date within 90 days prior to the filing date of
this annual                     report (the Evaluation Date); and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | presented
in this annual report our conclusions about the effectiveness of the
                    disclosure controls and procedures based on our evaluation as of the
Evaluation                     Date;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The
registrants other certifying officers and I have disclosed, based on
               our most recent evaluation, to the registrants auditors and the
audit                committee of registrants board of directors (or persons
performing the                equivalent function):
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) |  | all
significant deficiencies in the design or operation of the internal
                    controls which could adversely affect the registrants ability
to record,                     process, summarize and report financial data and have
identified for the                     registrants auditors any material weaknesses
in internal controls; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | any
fraud, whether or not material, that involves management or other employees
                    who have a significant role in the registrants internal
controls; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The
registrants other certifying officers and I have indicated in this
               annual report whether there were significant changes in internal controls
or in                other factors that could significantly affect internal controls
subsequent to                the date of our most recent evaluation, including any
corrective actions with                regard to significant deficiencies and material
weaknesses.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: April 10, 2003 | /s/ James J. Stebor James J. Stebor
President and Chief Executive Officer(principal executive officer)
|-------------------- | ------------------------------------------------------------------------------------------------------

---

|CERTIFICATIONS


I,
Cathy D. Pendell, Treasurer of First Federal Bancshares, Inc., certify that:
|------------------------------------------------------------------------------------------------

|(1) |  | I
have reviewed this annual report on Form 10-K of First Federal Bancshares,
               Inc.;
|--- |  | -------------------------------------------------------------------------------------------------

|(2) |  | Based
on my knowledge, this annual report does not contain any untrue statement
               of a material fact or omit to state a material fact necessary to make the
               statements made, in light of the circumstances under which such statements
were                made, not misleading with respect to the period covered by this
annual report;
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Based
on my knowledge, the financial statements, and other financial information
               included in this annual report, fairly present in all material respects
the                financial condition, results of operations and cash flows of the
registrant as                of, and for, the periods presented in this annual report;
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The
registrants other certifying officers and I are responsible for
               establishing and maintaining disclosure controls and procedures (as
defined in                Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) |  | designed
such disclosure controls and procedures to ensure that material
                    information relating to the registrant, including its consolidated
subsidiaries,                     is made known to us by others within those entities,
particularly during the                     period in which this annual report is being
prepared;
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | evaluated
the effectiveness of the registrants disclosure controls and
                    procedures as of a date within 90 days prior to the filing date of
this annual                     report (the Evaluation Date); and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (c) |  | presented
in this annual report our conclusions about the effectiveness of the
                    disclosure controls and procedures based on our evaluation as of the
Evaluation                     Date;
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) |  | The
registrants other certifying officers and I have disclosed, based on
               our most recent evaluation, to the registrants auditors and the
audit                committee of registrants board of directors (or persons
performing the                equivalent function):
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (a) |  | all
significant deficiencies in the design or operation of the internal
                    controls which could adversely affect the registrants ability
to record,                     process, summarize and report financial data and have
identified for the                     registrants auditors any material weaknesses
in internal controls; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) |  | any
fraud, whether or not material, that involves management or other employees
                    who have a significant role in the registrants internal
controls; and
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) |  | The registrants other certifying officers and I have indicated in this
               annual report whether there were significant changes in internal controls or in
               other factors that could significantly affect internal controls subsequent to
               the date of our most recent evaluation, including any corrective actions with
               regard to significant deficiencies and material weaknesses.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Date: April 10, 2003 | /s/ Cathy D. Pendell Cathy D. PendellTreasurer(principal financial and accounting officer)
|-------------------- | ------------------------------------------------------------------------------------------

---